July 1997
1 The definition of an affinity deal is where a company makes arrangements for its customers to receive benefits from another company whose customers form an affinity group. These guidelines set out Oftel’s broad approach to considering the possible competition effects of such deals.
For the purpose of these Guidelines:
2 The arrangements can take many forms which are ultimately designed to give competitive edge to the parties involved. However, affinity deals must not result in the restriction or the distortion of competition in a relevant or adjacent market. This is likely only where market power exists on the part of at least one of the suppliers as in the recent case involving BT/BSkyB.
3 However, marketing activity of this nature is an indicator of an increasingly competitive market place. BT is having to compete harder to retain its customer base by concentrating more on brand loyalty so that it is able not only to retain its customers but encourage them to increase their usage and grow the market.
4 BT is becoming more imaginative and innovative in the way it is experimenting in marketing its services. There have been a range of special promotions from which customers can benefit in terms of lower prices, albeit for limited periods of time. Oftel does not wish to discourage the continuing use of new marketing initiatives nor to constrain, without good cause, the range of affinity deals that BT undertakes.
5 Moreover, affinity deals with third parties will not be the sole prerogative of BT. Whilst, in the short term, BT is likely to be the strongest contender for developing third party promotions because of its brand image and geographical ubiquity, already we are experiencing innovative services and product promotions from other major telecommunications market players. The principles set out in these guidelines could equally be applied to other telecommunications operators with market power.
6 Under the new pricing formula effective from 1st August 1997, there will be no price controls in the retail market for business customers. However, there is a requirement for BT to offer ‘a small businesses package’ which in effect means that no call charges to this market sector can be greater than those offered to residential customers. Apart from the requirement for the ‘control’ package, there will be no other formal price controls on BT’s services to the business market. This will allow BT much wider scope to offer creative pricing to meet competition in this market place. Nevertheless, Oftel has a duty to ensure that initiatives – including affinity deals – which involve the granting of discounts or other incentives on a selective basis do not have the effect of unfairly strengthening or promoting BT’s market position at the expense of its competitors, or which unduly discriminates between one class of customer or competitor over another.
7 These principles are embodied in two key conditions of BT’s Licence (and of equivalence in other licences where appropriate), namely Condition 17 Prohibition on Undue Preference and Undue Discrimination and Condition 18A Fair Trading. The procedure of analysis set out below stems from the broad principles of these conditions:
(i) Is an affinity deal unduly preferential/discriminatory as between classes of customers of the telecommunications operator which is offering the promotion (particularly in those markets where the operator has market power)?
(ii) Does the object or effect of the promotion unduly exclude, to a material extent, existing or new entrants to markets for the provision of telecommunications services or the running of networks?
(iii) Does the agreement with the counter party and the affinity deal resulting from this, have an unduly exclusionary effect in practice – for example, by tying in customers for an unduly long period?
(iv) Does the deal breach the Fair Trading Condition which prohibits the abuse of a dominant position and also forbids the making of offers which are found to be anti-competitive?
(v) Does it unduly discriminate against a third party competitor, or third parties in a particular class?
8 Affinity deals are typically structured so that the customer is rewarded for the purchase of the products or services of the third party with discounted, and in some cases, free use of specific BT services. In many cases, the main market in which this type of promotion is primarily designed to have an impact is the market in which the third party company competes, for example the Flora Margarine Promotion (which involved the collection of Flora packaging to be exchanged for BT call minutes). There is, of course, also an effect on the market(s) in which BT operates which is of key importance.
9 An obvious feature of these affinity deals is that although they are rarely exclusive arrangements between BT and the third party, BT is likely to be (within the current environment for competitive supply) the most favoured telecoms operator for third parties to deal with because of its market strength, its geographical ubiquity and its high profile brand image. This can give rise to the perception that such deals are anti-competitive because they favour only those customers who are consumers of both the third party`s product (eg Flora Margarine) and of BT`s services. This means that, by nature, such promotions have a discriminatory element. However, it should not be assumed that simply because an offer is only open to that class of customer taking part in such affinity deals that it is automatically unduly discriminatory for the purposes of Condition 17 of BT’s Licence or is caught by the Fair Trading Condition.
10 Oftel has discussed with BT parameters for monitoring the effect of these types of promotions in those telecommunications markets being affected and BT has demonstrated a methodology and mechanism for the separation and accounting of marketing costs between different product lines and promotions. In particular, Oftel will be seeking full clarification of cost allocations between BT and the third party on the apportionment of costs related to the promotional offer, including marketing and distribution expenses.
11 BT is under no licence obligation to notify Oftel of affinity deals in advance. Notification would only be required if a change to an existing published tariff was being proposed. However, BT has agreed to give Oftel fair advance notice of promotions which may be perceived to be discriminatory or to have an effect on the markets in which both parties operate. For its part, Oftel will, where necessary, examine affinity deals which potentially raise issues according to the following schema.
12 Oftel’s only interest in analysing affinity deals is the possible effects of any promotion on competition in the telecommunications market.
The following checklist addresses this principle:
13 If it is not likely to have a negative effect, Oftel should not be concerned about the promotion. This could be, for instance, because the promotion will only strengthen the third party’s position in its own market and in addition, increase awareness of BT’s brand.
14 It is only if Oftel concludes that the promotion is likely to have a detrimental effect on competition in the telecommunications market that any action would be taken to move to the next stage.
15 Oftel has repeatedly stated that the business market is more competitive and this is reflected in the main planks of Oftel’s policy. Therefore, unless a promotion which is targeted at the business market, has clear anti-competitive features (eg seeks to run for a long period and thereby tie-in customers for the duration of this promotion), there is a presumption that Oftel should not be further concerned.
16 If however, a promotion is aimed at the residential market, Oftel would move to the next stage of analysis.
17 Oftel would be concerned if the promotion was unfairly targeted in such a way that it would have an adverse effect on competition, either geographically or by customer type. For instance, if a promotion was targeted only in areas where competition from cable operators or other regional telecommunications companies was strongest.
18 Oftel would also be concerned if a promotion was aimed at a particular class of customers (eg high spend users). For example, a free flight promotion should not only be aimed at those customers who, selected from BT’s residential customer base, are likely to benefit the most. In a more mature competitive market, this type of targeting would not be a concern.
19 However, if the promotion is not unfairly limited to a selective customer base, Oftel would move to the fourth stage of analysis.
20 Oftel would be concerned if the promotion was offered for an indefinite time or alternatively was offered as an exclusive deal. It then could be argued that the benefit from the promotion acted, in practice, as a reduction on the price charged for calls thereby in effect tying in the category of customers through use of the promotion for the duration of the offer. In such circumstances, Oftel would have to consider whether there were grounds for taking action under BT’s Licence.
21 Alternatively, Oftel would be concerned if BT had endeavoured to contract with a third party in terms which prevented that party from concluding similar deals with other telecommunications companies.
22 It is, of course, difficult to be precise in carrying out this analysis because there are many imponderables (such as the strength of brand images and particularly the benefits from associating well known national brands in customers’ perceptions). There are two conditions in BT’s Licence which Oftel would have to give full consideration as to the effect:
23 A more detailed analysis (including valuing brand image) may be necessary in some cases. However, it is envisaged that Oftel would only want to take action in those circumstances where there is a clearly detrimental impact on competition in the telecommunications market. An example of this could be if a third party covered the whole of the costs of a promotion with BT but where the benefits of that promotion, between the third party and BT, were equally distributed.
24 BT has indicated that it is still in the early stages of planning its promotions strategy. In the past, it has taken a fairly passive stance, by responding to third party requests to run promotions rather than actively seeking partners. However, Oftel expects this position to change as the whole arena of loyalty and rewards programmes undergoes massive growth.
25 BT states that it has not as yet sought to trial promotions in a selected area to check uptake in advance. If Oftel was approached by BT for such a trial, Oftel would seek pre-notification in the usual way as with a commercial trial.
These guidelines will therefore be kept under review and updated in the light of market developments.